Tuesday, January 04, 2005

National Sales Tax

I thought of an interesting problem, technically, two problems that would have to be solved before the federal income tax system could be replaced with a national sales tax. I’m not necessarily for or against a national sales tax, but many people think it is a good idea

First, one could avoid a lot of taxation by buying items on credit before the national sales tax is implemented. That purchase would remain untaxed as would the income used to pay the debt. This could end up being a big problem because people are likely to make many large purchases, everything from cars, boats, and planes, to hot tubs and big screen TV’s. I know that would be the first thing that I would think of, buy that new car before the sales tax hits. But then again, the government knows how to get its money and might devise a way to hit remaining credit balances with the tax when it goes into effect.

Secondly, and a bigger problem if you ask me, people could be taxed twice on their hard earned income. Any money in the bank when the national sales tax goes into effect was taxed when it was earned, and will be taxed again when it is spent. Imagine getting that $1000 bonus, say, $600 after taxes in December, but when you spend it in January, you are hit with an extra 17% or so tax, basically making your $1000 bonus worth about $500. This would be even worse for those who have been saving for retirement all their life, all while being taxed (yes, 401K’s are taxed on withdraw, but not all retirement savings are that way, such as CDs ROTH IRAs, good old savings accounts), suddenly at retirement, everything costs 17% more due to the tax. They will have to work out some sort of tax refund system when you are spending money that has already been taxed as income.

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